When to Buy – Low Risk & High Reward

This post contains three simple charts that will give all investors a fantastic risk vs. reward setup/ signal. By following these simple charts, any investor should be able to consistently outperform the market (buy when the market is deeply depressed and sell when it becomes over-bought). Please keep in mind that these signals are for longer term investors as they only appear once every year or so.

The three charts represent the % of stocks above the 50-day moving average for the NASDAQ, the % of stocks above the 200-day moving average for the NASDAQ and the % of stocks above the 50-day moving average for the S&P 500.

The recent sell-off has been steep (points only) but unfortunately, we haven’t come close to historic bottom signals. This simple fact (using the charts below) suggests that the market has further room to consolidate so be careful with your buy and sell decisions.

Hi Chris, Good points… I don’t think the timing is right yet. I think theres a good chance of more movement to the downside with all the greece issues going on right now. I think there may be some better entry points in the coming weeks.

I could see this working well since 2008 with all the extreme oversold/overbought conditions that seem to happen every year. What about a strong uptrending market like in the 80s and 90s? Would you sell in overbought territory and never be able to buy back in? Just curious.

Aaron, the indicator is structured to give an accurate signal more so on the oversold side rather than overbought. Overbought levels can be maintained for months. Extreme Oversold levels are historically accurate nearly every time.

Thanks for the response! I noticed this past week that the Nasdaq and SPX 50MA’s dipped into oversold territory, but not the Nasdaq 200MA chart. Do you wait for all three to confirm? I bought near the bottom this week but ended up getting out with a scratch in the chop action (fearful of another leg lower…). In hindsight, had I stayed in the trade based on the signals in the above charts, I’d still be showing a profit.

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Trend Trading

I am a trend trader looking for gains of 25% or more and losses no larger than 10% (preferably smaller when I am smart enough to cut the immediate loss) on trades that will last anywhere from a few weeks to several months or longer. I aim to be prepared to trade in situations when the odds are in my favor by properly employing risk management strategies such as position sizing and expectancy.